2023 Midyear Planning Outlook

The Wells Fargo Investment Institute (WFII) “2023 Midyear Outlook: Navigating End-of-Cycle Turbulence” report highlights several factors that may have an impact on your investment planning decisions in the year’s second half. We have identified three of these factors that present potential planning risks and opportunities:

Interest rates are forecasted to continue to rise with WFII anticipating one further increase in the federal funds rate before year-end. Understanding how higher rates are likely to affect you and what to do when rates change is important as you seek to meet your financial goals.

A recession in the second half of 2023 looks likely. WFII is already seeing a slowdown in manufacturing and housing data. The good news is the analysts believe the economic contraction will be moderate and the U.S. will see a return to growth in 2024.

Declining equity values may accompany the economic slowdown over the coming months as earnings growth slows. WFII anticipates a rebound in 2024 as the economy begins to recover.

Now is the time to consider wealth planning strategies to help protect your wealth and take advantage of opportunities as these late-cycle economic and market trends play out.

With this information in mind, here is an actionable checklist of current planning opportunities:

1. How will higher interest rates impact your income? Are you nearing retirement or in retirement? Your bond portfolio will need to be carefully managed to help enable you to take advantage of higher interest rates and help protect you from future rate fluctuations as you seek to meet your income needs. WFII analysts recommend a barbell strategy where you invest in both short- and long-term bonds to help optimize returns and manage risk. Weigh your investment options to determine whether such a strategy is right for you and consider other income-generating strategies.
2. How can a slowing economy help your planning strategies? If equity values decline as forecasted, the answer may lie in taking advantage of lower asset prices for long-term tax planning. For example, if you think you’re likely to be in the same or a higher tax bracket when you retire, you may want to talk with your advisor about converting your Traditional IRA to a Roth IRA. Converting allows you to reposition your current tax-deferred Traditional IRA to a tax-advantaged Roth IRA by paying federal and possibly state income tax (but without the IRS 10% additional tax for taking early or pre-59½ distributions on the taxable amount of the conversion. The benefit of a Roth conversion is qualified distributions are tax-free — unlike distributions from Traditional IRA. Qualified distributions, which are tax-free and not included in gross income, are when your account has been open for more than five years and you are at least age 59½, or as a result of your disability, or using the first time homebuyer exception, or taken by your beneficiaries due to your death.
3. Can depressed asset prices offer other opportunities? Are there possible tax advantages in gifting assets when their valuations are lower? The answer is yes. There are several strategies you may want to consider. These may include gifting stock to a charity or family member as part of a wealth-transfer strategy. In both cases, the recipient may benefit more if the assets appreciate. A family member may also pay less tax.

Some of the planning strategies referenced are complex; we recommend discussing them with your tax, legal, and investment professionals before implementing them.

All investing involve risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors some of which may be unpredictable. Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Be sure you understand and are able to bear the associated market, liquidity, credit, fluctuations in yields and returns, style and sector specific risks and employment of complex trading strategies and aggressive investment techniques as well as the specific risks involved in an investment in a particular product.

Wells Fargo & Company and its affiliates do not provide tax or legal advice. Please consult your legal and tax advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared.

Wells Fargo Wealth & Investment Management (WIM) is a division within Wells Fargo & Company. WIM provides financial products and services through various bank and brokerage affiliates of Wells Fargo & Company. The Private Bank is an experience level for qualifying clients of Wells Fargo Wealth & Investment Management (WIM). WIM offers financial products and services through affiliates of Wells Fargo & Company. Bank products and services are available through Wells Fargo Bank, N.A., Member FDIC. Brokerage products and services are offered through Wells Fargo Advisors, a trade name used by Wells Fargo Clearing Services, LLC, and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.

Wells Fargo Investment Institute, Inc., (WFII) is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.